The hedonic regression time-dummy method and the monotonicity axioms

American Statistical Association
Publication Type:
Journal Article
Journal of Business & Economic Statistics, 2005, 23 (4), pp. 485 - 492
Issue Date:
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This article demonstrates that the well-known and much applied hedonic regression time-dummy method, used to construct quality-adjusted price indexes, fails the monotonicity axioms from index theory. The article outlines the hedonic time-dummy method and defines the monotonicity axioms in this context. A simple numerical example is used to illustrate the failure of monotonicity. The reasons for this failure are identified and discussed. The frequency of the violation of monotonicity is considered in general and investigated for a particular dataset. The article concludes by considering the seriousness of the failure of monotonicity and briefly discusses an alternative hedonic method that satisfies monotonicity.
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